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Spotify-Backed Startup Scores Music Streaming Deal With McDonald's

Could Provide Background Tunes for 36,000 Restaurants Worldwide

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A Spotify-backed startup targeting the market once known as Muzak has scored a major client, reaching a deal to pipe background music into as many as 36,000 McDonald's locations worldwide.

The agreement gives Soundtrack Your Brand, one-third owned by Spotify, its first foothold outside of the Nordic region, where it has offered its "Spotify Business" streaming since mid-2014. McDonald's and its franchisees in more than 100 countries can sign up on pre-approved terms, Soundtrack Chief Executive Officer Ola Sars said in an interview. In the unlikely event the entire group joined, Soundtrack would reap about $17 million in annual revenue.

Perhaps more important is the endorsement of the world's biggest restaurant chain. Knowing McDonald's is a client could influence other companies considering Soundtrack's service. Sars, who helped create Beats Music, plans an aggressive push into the U.S. as he seeks to dethrone market leader Mood Media, which acquired Muzak in 2011 and retired the name two years later.

"The market is super fragmented and dysfunctional, and when we looked at the numbers, we realized nobody had a simple cloud-software distribution solution," Sars said in an interview at Soundtrack's headquarters in Stockholm. Rivals are still shipping out CDs and sending out salespeople in ties, he said. "You just can't do that when you start to think about the millions of smaller companies that need music."

While Spotify and Apple dominate streaming for consumers with a combined 43 million paying customers, they're not for commercial use. Like with baseball games, radio or CDs, proprietors aren't generally allowed to play online music in stores without paying a fee.

Major retailers and restaurants understand this, but Sars said many smaller shops still don't follow the rules -- and that's an opportunity for Soundtrack. An online platform with intuitive, customizable playlists is key to attracting customers that often fall through the cracks, he said. He wants to take advantage of the boom in cloud-based music and attract enterprises to the same legal formats that weaned consumers away from pirated lists and illegal streaming.

"If you go down to a retailer who has maybe 20 to 30 locations, they probably don't contact the professional service provider," Sars said. "You need to be able to distribute the service in an efficient way and if it's accessible online then there's a huge market."

For decades, the market has been served by companies like Toronto-listed Mood, whose biggest investors are Arbiter Partners and Wingspan Investment Management. Mood reported $475.1 million in revenue in 2015, a 3.8% decline. Financing costs on more than $600 million in debt contributed to a loss of almost $80 million.

A Mood Media spokesman declined to comment. The company offers its own streaming platform, Mood Mix.

McDonald's in Sweden signed up with Soundtrack last year, said Alexandra Hempel Svenonius, a spokeswoman in Sweden. They used data from Spotify to create a sound that can be adjusted for local campaigns, she said. Soundtrack "can deliver the largest music catalog on the market," Svenonius said.

Streaming has become more important to an industry that's seen its revenues slump over the past two decades. Global music sales rose 3.2% to $15 billion in 2015, boosted by a 45% jump in streaming revenue, according to the International Federation of the Phonographic Industry.

There are fewer business locations for music compared with the billions of global consumers targeted by Spotify or Apple Music, but stores pay about $40 a month versus $10 for private listeners. There's money for artists too. Rights holders get about about half of Soundtrack's revenue from companies, while Spotify sends about $7 back to rights holders like labels, publishers and musicians for every $10 in sales.

In the Nordic region, Soundtrack has an agreement to use the name of its well-known investor, and depends on Spotify's catalog of about 30 million tunes. In the U.S., the company will use its own brand and has signed agreements with third-party music license holders, Sars said.

Music can be used to create a mood within stores and help sell products or services, said Simon Dyson, a music-industry analyst at Ovum in London. "In-store radio and background music is a big money spinner for so many parts of the music industry and it will continue to be for the foreseeable future," he said.

While Sars helped create Beats Music, co-founder Andreas Liffgarden was Spotify's former head of phone-carrier business development. Soundtrack raised 90 million kronor ($11 million) in a series-B round funding last year from investors including Spotify, Telia AB and PlayNetwork.

Soundtrack had sales of 1.2 million kronor in 2014, according to its latest available financial data. It's grown since then and now calls fashion company Odd Molly International AB and Starbucks in Sweden clients. With about 5,000 locations now, Soundtrack will reach breakeven once it reaches about 25,000, Sars said.